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The Real Problem with Outsourcing

by Jonathan Rees

Mr. Rees is Associate Professor of History at Colorado State University - Pueblo. He is the author of MANAGING THE MILLS: LABOR POLICY IN THE AMERICAN STEEL INDUSTRY DURING THE NONUNION ERA (University Press of America, 2004) and Co-Editor of THE VOICE OF THE PEOPLE: PRIMARY SOURCES ON THE HISTORY OF AMERICAN LABOR, INDUSTRIAL RELATIONS AND WORKING-CLASS CULTURE (Harlan Davidson, 2004).

A few weeks ago, Gregory Mankiw, Chairman of President Bush's Council of Economic advisors, publicly praised the outsourcing of American jobs overseas. “I think outsourcing is a growing phenomenon,” he said, “but it's something that we should realize is probably a plus for the economy in the long run."

A bipartisan uproar ensued. Even Republican House Speaker Dennis Hastert challenged these remarks. Mankiw quickly distanced himself and his administration from this insensitive position.

The saddest thing about this brouhaha is that as far as economic theory goes, Mankiw was absolutely right. Theory does not always translate into practice, but there are clear, indisputable benefits to outsourcing.

Outsourcing, to quote Mankiw again, "is just a new way of doing international trade.” International trade benefits the economy of each nation involved. Even though American jobs are being outsourced, American consumers benefit from lower prices that outsourcing makes possible and the investment that businesses doing the outsourcing make in other parts of our economy.

In a free society, trying to stop capital (human or otherwise) from moving would be like trying to hold back the ocean tide. In the 1920s, textile jobs migrated from the Northeast to the low wage, non-union South. After World War II, all kinds of manufacturing jobs migrated to the Sun Belt for similar reasons. Now, thanks to new technology and international free trade agreements, American jobs are migrating across international borders.

The problem with outsourcing is not that it exists or that George Bush's economic advisors approve of it. The real problem with outsourcing is that the Bush administration hasn't done nearly enough to cushion the blow for workers who have suffered because of this phenomenon.

Outsourced workers often find themselves with no choice but to accept lower-paying jobs totally unrelated to the skills they learned for their outsourced position. As Mankiw himself suggested in his apology for the remarks quoted above, “ [W]e have to acknowledge that any economic change, including those that come from trade, can cause painful dislocations for some workers and their families." Rather than stop that change, he argued, government should try “ to ease the transition of workers into new, growing industries."

Over the course of modern American history, whenever new economic trends have damaged the position of American workers, the government has eventually come to their aid. The massive ill effects of industrialization were at least partially mitigated by the reforms of the Progressive Era. When the Depression demonstrated that nearly every American was vulnerable to the twists and turns of the market economy, Franklin Roosevelt's New Deal tried to help workers survive those hard times.

Unfortunately, rather than mimic the policies of Wilson or Roosevelt, Bush and his allies have only made the problems of outsourced workers worse. Republicans in Congress have consistently resisted Democratic efforts to extend unemployment benefits at a time when finding work is harder than ever. The administration even denied a request by former IBM software workers to get aid under a program designed to help outsourced labor.

And even though President Bush has recently been touring the country in support of a proposal to increase federal job-training funds by $250 million, according to former Democratic presidential candidate John Edwards, federal support for job training has dropped by an inflation-adjusted total of $972 million since President Bush took office in 2001.

To make matters worse, economists are beginning to worry that the growth of outsourcing will have a negative effective on federal tax revenues, thereby making any new effort to help displaced workers increasingly unlikely. As Theodore Seto recently explained in the Atlanta Journal Constitution, “When a U.S. corporation manufactures in the United States, its income is subject to U.S. tax at a nominal rate of 35 percent. If the same corporation moves those jobs to some other country, it can normally structure the deal to reduce its U.S. taxes to zero.” Just because outsourcing can't be stopped does not mean the tax system should accelerate it, especially when its victims are largely left to fend for themselves.

George Bush and his economic team have offered nothing but lip service towards these problems. Instead, they've tried to obscure the situation, going so far to suggest that fast food jobs be reclassified as manufacturing positions so as to make outsourcing damage look smaller than it is. The people who aspire to higher-paying jobs than those available at McDonald's certainly know the difference because they have to scrape out a living, no matter what the economic reports say.

"We're going back to the 1930s, when we had multiple families living together because times were so tight,” one outsourced Georgia resident told the Associated Press recently. "I'm not sure these corporate executives understand the true costs of outsourcing -- no one's thinking about that, just the bottom line." If American business goes full steam ahead into the twenty-first century while many American workers are returning to the Depression years, are we really making progress?